SEP 401 k – Basic Guide to Avoid Prohibited Transactions

SEP 401 k

SEP 401 k

The SEP 401 k is one of the most popular retirement investments that can offer a viable return on investment. However, in order to maximize the perks of the Self-Directed 401k, there are essential things all plan participants must understand particularly the Prohibited Transactions. It is useless to master the Solo 401 k calculator and other tools for wealth-building if you do not prevent transactions that could jeopardize your retirement plan. The best Solo 401 k investment is the one that is not listed under Prohibited Transactions.

The SEP 401 k Transaction Rules

There are no specifications as to what investments are allowed for the Individual k retirement policy as stated in the Internal Revenue Code and the Employee Retirement Income Security Act or ERISA. However, both the IRC and ERISA clearly describe the investments or transactions that are considered prohibited when using the 401k retirement plan for small business. The reputable and trusted 401k plan providers also guide their plan owners to avoid making irreparable mistakes in using their qualified retirement plan.

What is a disqualified person?

When making SEP 401 k transactions, make sure the transaction does not involve a disqualified person in order to avoid penalties. Under the Internal Revenue Code Section 4975, disqualified persons are the Individual k plan participant, the plan owner’s ancestors and lineal descendants. Any entities where the plan owner is a major operator or holds management interest or controlling equity are likewise considered disqualified persons.

What are Prohibited Transactions?

Self-dealing transactions are prohibited where the “disqualified person” uses the Solo k assets or income in order to finance his own interest or account. Transactions with conflict or interest are likewise restricted where a “disqualified person” uses the retirement plan savings, loans, and assets to fund any party that he is connected with. Direct Prohibited Transactions are the direct or indirect renting, selling, or trading of any properties between the disqualified person and the SEP 401 k plan. The direct or indirect loan of funds, transfer of income or assets, and direct or indirect furnishing of properties between the disqualified person and the Solo k plan is likewise prohibited.

Before you embark on an investment that requires using the SEP 401 k fund, make sure that it is primarily legal and allowed. Prohibited Transactions incur numerous penalties and sanctions that could prevent all plan participants from maximizing the full potentials of the self-employed 401 k plan.

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